Reasons to switch banks when your fixed term mortgage rate expires
Hannah McQueen is a financial advisor, chartered accountant, personal finance author and founder of enable.me – financial strategy and coaching.
OPINION: When your mortgage’s fixed interest rate expires, you might want to shop around to see if another bank might be able to give you a better deal, especially if interest rates go up.
Then again, you might not – Canstar data suggests that only 4% of us have changed banks in the past year.
To me, that suggests that we’re either very loyal (to organizations that collectively make over $5 billion in profits), that we can’t be bothered, or that we see no reason to create a lifetime admin.
* Have people been stupid to buy a house in the past two years?
* More than half of household income goes on mortgage, says CoreLogic
* Don’t expect home loan rates to fall quickly next year, economist warns
The difference between the interest rates offered tends to be marginal, which may not seem convincing enough. But there are more important reasons why you might consider it.
Reasons to Consider Switching
I tend to divide the rationale for change into three categories – tactical, strategic, and values-based.
Tactical reasons include the pursuit of better interest rates, or perhaps a repayment offer that could help offset the impact of rising interest rates or give you a clean injection of cash. If your situation is strained, this saving — or any saving — might warrant a change.
Although it doesn’t make sense, you can usually negotiate a slightly better deal when you’re a new bank customer, rather than an existing customer.
Values-based reasons may include that you want to do business with a New Zealand bank or that you don’t like the way your bank has treated you.
Strategic reasons are where the impetus to change becomes most compelling – and what tends to drive our clients’ reasons for refinancing.
Chris McKeen / Stuff
Infometrics chief forecaster Gareth Kiernan explains what a high official cash rate means for mortgages
Let’s start with the basics. One of the keys to growing wealth is your ability to access loans. The more loans you can access, the more wealth you can expect to build.
I had a client situation last week where the banks move unlocked another $250,000 borrowing potential, which created a significant advantage for their wealth building strategy.
Another strategic reason could be that you have secured yourself a short-term mortgage, which squeezes your cash flow and reduces your ability to do other things with your money, such as borrowing to buy another property.
Extending your tenure to 25 or 30 years doesn’t mean I want you to take that long to pay it back – I just think there are better, more flexible ways to do it that also allow you to maximize your ability to re-enter equity to get rich quicker.
Another reason to switch could be to extend an interest-only period on an investment property.
Banks tend to initially grant a maximum term of five years, but may become reluctant to extend this term – and a new bank may grant it in order to secure your business.
If you still have a mortgage on your home, it makes sense to prioritize repayment over paying principal and interest on your investment property. It also improves cash flow and maximizes tax deductibility.
Another strategic reason to consider switching banks is when you want to remove cross-securitization from your home.
If you used the equity in your home as a deposit for an investment property and then used the same bank to borrow the balance on the new property, your home provides some of the security for that asset.
If you’ve paid off that part of the debt, you’ll usually want to release your home as collateral to reduce your exposure – but you may need to refinance with another bank to achieve this.
What to pay attention to
The biggest source of reluctance to switch banks is usually the faff – the life administrator – but it’s much easier than before.
Your new bank will be able to replicate your direct credits and automatic payments almost without you having to do anything.
If you have a mortgage, you should be aware that changing the bank shown on the title deed of your property will likely incur costs, although the cash incentive from the new bank should help cover these costs.
You should also be aware that if you have received a cash incentive from your bank within the past three years, you may need to repay some of it if you leave during this time. This is called a ‘clawback’ and will be a clause in the contract you signed when you accepted the original loan.
There may also sometimes be a termination charge, depending on your fixed loans and how interest rates are changing at the time (this is less likely in today’s rising interest rate environment).
The bank is not your enemy, most of us need them – and using their money can help accelerate your wealth creation, provided the mortgage is on an earning asset (building of investment), rather than an unproductive asset (your house).
But the bottom line is that if the rationale for change exists, don’t confuse banks with a friend who deserves your loyalty.